From subsidies to imbalances

Increasing agricultural exports seem to have caught the fancy of the US trade regime in the recent weeks. The trigger for this thinking: President Barack Obama’s statement during the Toronto Group of Twenty summit in June that the outcome of the Doha Round negotiations must ensure new market opportunities in key emerging markets—including China, Brazil and India. More recently, in the Senate committee on agriculture hearing on promoting US agricultural exports, US trade representative Ron Kirk said the US was taking “the lead in pursuing new trade opportunities, with a special focus on the world’s fastest-growing markets, through initiatives with individual trading partners, across economically significant regions…" This strategy, according to Kirk, served as testimony that the Obama administration was “committed to trade policies that keep American farmers and ranchers supplying high-quality food and fibre around the world".

It is interesting to note that the aggressive posture taken by the US to promote its agricultural exports comes at a time when Washington’s subsidies to this sector are on an increase. Recent figures from the Organisation for Economic Cooperation and Development (OECD) bring out the startling fact that total farm subsidies granted by the US (total support estimate, or TSE, in OECD parlance) increased by a whopping 22% between 2008 and 2009. As a result of this increase, total farm subsidies reached their highest level since OECD started recording farm subsidies in 1986. At the same time, OECD members as a whole have also upped their farm subsidies to a historically high figure of $384 billion. Thus, farm support given by OECD countries in 2009 exceeded a billion dollars a day.

The high doses of support that developed countries provide to their farms make a mockery of the economics of agricultural trade. Instead of relative efficiencies, it is the ability of the countries to provide subsidies that has formed the basis of trade in this sector. The World Trade Organization (WTO) has taken on the onerous task of reining in farm subsidies: It is implementing disciplines for gradual reduction of these subsidies provided in the Agreement on Agriculture (AoA) that was negotiated in the Uruguay Round in the late 1980s-early 1990s. But the inherent defects in the structure of AoA have torpedoed any possibilities of cleansing global markets of these market-distorting farm subsidies.

India and other developing countries have been consistently arguing that the Doha Round needs to be cognizant of the fact that AoA has done little to make any impact on market distortions created by subsidies. India and others say they can reduce their relatively high levels of tariffs only if a parallel movement on reducing farm subsidies takes place. One of the major reasons for the deadlock is that the US has remained fixated on its position: It sees high levels of farm subsidies as an essential component to its domestic policymaking.

In this context, it must be pointed out that the subsidy discipline that AoA has introduced leaves out several significant elements of the subsidies programme. The share of these subsidies that AoA turns a blind eye to was nearly 90% of the total farm subsidies the US is reported to have given in 2007. The subsidies so wilfully ignored include direct income support, where the government basically doles out a regular income to farmers; this has assumed importance as the US has been shifting away from conventional forms of market price and input subsidies, where the government reduces or increases some prices.

The trouble here is that direct income support is conveniently not included in the WTO subsidies discipline: The US and the European Union, which had played a decisive role in shaping AoA, had argued then that this form of subsidies did not distort markets, since farmers’ production decisions were not affected if they receive a regular cash handout from the government. But it is pretty “elementary", as Sherlock Holmes would say, that a steady flow of income support to farmers would not only help increase their risk-taking capacity, but also help them in selling their products below cost. Evidence has it that US producers have been dominating the global markets in several commodities, including cotton—where the victims of their predatory practices have been some of the poorest countries in central Africa. In fact, so egregious is the cotton case that a dispute settlement panel constituted in response to a complaint brought by Brazil found the US subsidy regime in violation of even the relatively lax WTO subsidies discipline. The ruling of the panel, issued in 2007, was confirmed by WTO’s appellate body the following year.

It is quite clear that the continued US push for increased market access for its farm producers would result in aggravating an already unequal position in global agricultural markets. The only way to counter this tendency is to bring the momentum back in the Doha Round negotiations; this time, member countries must explore lasting solutions for such predatory practices. Perhaps more importantly, India and other developing countries must underline the need to put a comprehensive discipline on farm subsidies. That alone will ensure that the negotiations in the Doha Round culminate in a balanced outcome.

Biswajit Dhar is director general at Research and Information System for Developing Countries, New Delhi.